Managing a Portfolio of Collateralized Debt Obligations

Abstract

A collateralized debt obligation (CDO) is a security backed by a diversified pool of one or more classes of debt. The asset classes that have been used as collateral for a CDO include U.S. domestic investment-grade and high-yield corporate bonds, U.S. domestic bank loans, emerging market bonds, special situation loans and distressed debt, foreign bank loans, asset-backed securities, real-estate investment trusts, residential mortgage-backed securities, and commercial mortgage-backed securities. In this article we set forth investment principles for managing a portfolio of CDOs.